NEW DELHI: Call it a jaw-dropping announcement if you will. Finance Minister Nirmala Sitharaman on Friday sprang a huge surprise by effecting the biggest-ever slash in corporate tax rates in 28 years to slay the slowdown demon, drawing cheers from the markets and the industry alike.
The tax cut, which comes with retrospective effect from April 1, will apply to all domestic firms that don’t avail any incentives.
For domestic firms, the tax has been axed from 30% to 22%, while for manufacturers setting up shop after October, it was down to 15%.
Companies that pay Minimum Alternate Tax will also be given relief with the tax rate coming down to 15% from 18.5%.
Sitharaman said the changes in the Income Tax Act and Finance Act will be made effective through an Ordinance.
Revenue Secretary Ajay Bhushan Pandey pointed out that the “current effective tax rate for companies with a turnover above Rs 400 crore stood at 34.9% taking all surcharges into account. That rate is now brought down to 22.17%. For new manufacturing firms, the effective rate was 29.1%. Now, this goes down to 17.01%.”
Markets gave a big thumbs up to the announcements, which were made during market hours.
The BSE registered a massive intra-day rise of 2,284.55 points to a peak of 38,378.02, before settling 1,921.15 points higher at 38,014.62. The broader NSE Nifty, too, zoomed 569.40 points to end at 11,274.20.
Analysts said it was the highest gain for the two bourses in a single day since May 18, 2009, when the UPA came back to power.
As corporate tax is estimated to be a key revenue source constituting more than 20% of total taxes. the cut will prove to be costly for the government, which will be foregoing some Rs 1.45 lakh crore annually.
“We are conscious of the effect tax rebate will have on the fiscal deficit; we will reconcile numbers,” Sitharaman said, without explaining how it will be done. The reduction of corporate tax rate was a long pending demand of India Inc. Former finance minister Arun Jaitley had promised two years ago that the Modi government will move to a single 25% corporate tax rate for all companies.
The higher surcharge on capital gains on sale of equity, announced in the Budget, was also rolled back.
“These are definitely bold and welcome measures. It will augur well for our economy,” RBI Governor Shaktikanta Das said.